Ford case defined role of business

Sen. E­liz­a­beth Warren hopes to see a new legal chart­er ad­opt­ed by big A­mer­i­can busi­nes­ses. The Mas­sa­chu­setts Democrat's i­de­a being to kill the no­tion that cre­at­ing share­hold­er value is the only valid pur­pose of a cor­po­ra­tion.

One thing that's puz­zling a­bout her ideas, as de­scribed in a Wall Street Journal es­say last week, is the sug­ges­tion that the focus on share­hold­er value is some sort of late 20th-cen­tu­ry de­vel­op­ment.

In fact busi­ness exec­utives have been ar­gu­ing over the pur­pose of a cor­po­ra­tion at least since the case of Dodge v. Ford Motor Co., a decision com­ing up on its 100th anni­ver­sa­ry.

The Ford share­hold­ers won here, too, although they got far less than they want­ed. What's important is that Ford Motor founder Henry Ford still had the right to do ex­act­ly what got him sued in the first place — going a­head with a plant ex­pan­sion rath­er than pay out all the mon­ey to share­hold­ers.

This doesn't seem to be a land­mark legal case, maybe be­cause it was de­cid­ed by a state su­preme court, but it sure is a great sto­ry. The star wit­ness was the Steve Jobs or Elon Musk of his era, and it's a fun case to show how this is­sue isn't black and white.

Ford was a head­line-mak­ing cele­b­ri­ty even be­fore he was tak­en to court by bro­thers John and Hor­ace Dodge, the en­tre­pre­neurs who gave us the Dodge auto­mo­tive brand. They were all once up­starts in De­troit when it was the Sil­i­con Valley of the early 20th cen­tu­ry, the hot­bed of an em­er­ging in­dus­try.

Ford had al­read­y flopped twice by the time Ford Motor Co. was formed in 1903. There is plen­ty to sug­gest all he want­ed was to run a car busi­ness with­out any di­rec­tors, in­ves­tors or oth­er "par­a­sites," as he called them. But he need­ed mon­ey. He also need­ed sup­pli­ers.

The Dodge bro­thers in 1903 agreed to build motors and trans­mis­sions for Ford. They also in­vest­ed $10,000 — none of it in cash — in ex­change for own­er­ship in Ford Motor Co.

It's no real sur­prise the part­ners later had trou­ble get­ting along. They had the same risk prob­lem, just dif­fer­ent sides of it. Ford could re­place them by bring­ing work in-house, yet Ford had to rely on a key sup­pli­er that could eas­i­ly be­come a tough com­pet­i­tor.

What made all of them spec­tac­u­lar­ly rich was the cre­a­tion of the Ford Mod­el T, a re­li­able car first rolled out in 1908 that was far more af­ford­a­ble than com­pet­ing Oldsmobiles or Buicks.

In the 1910 fis­cal year, Ford pro­duced more than 18,000 cars and the Mod­el T was priced at $900. Six years later, Ford produced nearly 500,000 cars and the price of a Mod­el T had been cut in half.

That's when Ford, the com­pany chief ex­ec­u­tive and near­ly 60 percent own­er, de­cid­ed there would be no more spe­cial di­vi­dends to share­hold­ers.

The Dodge bro­thers still owned 5 percent of the com­pany each and knew Ford Motor was a­wash in mon­ey in the sum­mer of 1916, with $54 mil­lion in cash and in­vest­ments, or a­bout $1.3 bil­lion in 2018 dol­lars. It had just earned a­bout $60 mil­lion for the fis­cal year. Yet Henry Ford claimed the com­pany need­ed the cap­i­tal to keep ex­pand­ing.

Ford put his am­bi­tions this way, in tes­ti­mo­ny quot­ed in the court de­ci­sion: "To em­ploy still more men; to spread the bene­fits of this in­dus­trial sys­tem to the great­est pos­si­ble num­ber, to help them build up their lives and their homes."

Ford is a com­pli­cat­ed hero for any­body cheer­ing for cor­po­ra­tions to act more like this. For one thing, he wasn't just a pa­ter­nal­is­tic em­ploy­er but au­thor­i­tar­i­an, cre­at­ing a sort of Ford Motor secret po­lice to keep tabs on workers when they were off the clock.

Some of the in­itia­tives he's fa­mous for, like his shocking move to more than double work­er pay in 1914 to $5 per day, could also be seen as self-ser­ving.

Boost­ing wages turned out to be one fix to a mas­sive em­ploy­ee turn­o­ver prob­lem, as it wasn't much fun work­ing on a mov­ing as­sem­bly line and work­ers had been quit­ting in droves. Pay­ing $5 also kept la­bor cost pres­sure on undercapitalized com­peti­tors.

By 1916, that in­clud­ed the Dodge bro­thers. So an­oth­er rea­son to keep the Ford Motor prof­its in the com­pany was to keep the Dodge boys from in­vest­ing their Ford Motor di­vi­dends in the Dodge Brothers car business.

They sued Ford Motor a­bout the miss­ing di­vi­dends and also sought the court's help to block a mas­sive new Ford manu­fac­tur­ing plant, which would only lead to an even big­ger com­pe­ti­tive dis­ad­van­tage for them.

Luck­i­ly for them, Ford proved to be a terri­ble de­fend­ant. He sug­gest­ed in­ves­tors like the Dodge bro­thers had al­read­y made en­ough mon­ey on Ford and didn't de­serve any more. On the wit­ness stand, he com­plained that "we don't seem to be able to keep the prof­its down" and in­sist­ed Ford Motor was or­gan­ized and run to only "in­ci­den­tal­ly" make mon­ey.

One the­o­ry on the case is that Ford de­cid­ed he cared more a­bout be­ing viewed as a regu­lar guy than win­ning, and had he not talked non­sense from the stand, no judge would have had to write that the pri­mary pur­pose of a cor­po­ra­tion was mak­ing mon­ey for own­ers.

Yet while the Michigan high­er court said the Dodge boys (and oth­er share­hold­ers) should receive some of the prof­its, it let Ford Motor go a­head with its big ex­pan­sion. It was up to the man­ag­ers and di­rec­tors, not the court, to de­cide how the com­pany and its own­ers were bet­ter off.

This is the legal layman's lesson out of this story. A lot of what Sen. Warren com­plains a­bout, like put­ting cap­i­tal into buy­ing back stock rath­er than plant ex­pan­sions, isn't re­quired by any­thing in the law. Repurchasing shares could easily be shortsighted. A CEO also should be able to de­fend, as com­pe­ti­tive strat­egy, be­com­ing known as the best-pay­ing em­ploy­er in an in­dus­try.

It also seems clear that neither the Dodge brothers nor Henry Ford would have had much respect for managers whose only ideas for creating share­hold­er value were cutting costs and buy­ing back shares.

lee.schafer@startribune.com 612-673-4302